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Do Cash Advances Hurt Your Credit Score?

Imagine you’re driving to work when suddenly you start to notice one of the telltale signs that your tire has gone flat. While a flat tire might seem like a relatively minor problem for some people, the consequences may be significant to you. You may not have the savings to pay for a new tire, and maybe your car is the only way for you to get to work. If you miss shifts at work, your next paycheck could be lighter than normal, making it even harder to pay for your new tire along with your other regular expenses.

So, what can you do when you run into an unexpected emergency expense and don’t have the savings to cover it? Well, a cash advance may be just what you need to help you out until your next paycheck.

Maybe you have some reservations and are asking yourself questions like, “do cash advances hurt your credit?” or, “do payday loans show on credit reports?”. It’s important to be able to answer these questions and more if you’re thinking about taking a cash advance. So, we’re going to shed some light on the ins and outs of a cash advance and try to help you understand how it might affect your financial future.

What Is A Cash Advance?

So, what is a cash advance? It can mean a couple of different things. In some cases, it’s a short-term loan from a financial institution. This might be in the form of a payday or installment loan.

It can also be a service available through your credit card provider where you’ll be able to withdraw cash from your credit card. Your credit card withdrawal limit may be anywhere from a couple hundred dollars to several thousand, but it likely won’t be as much as your credit limit for that account.

In this instance, you’ll be borrowing the money from your credit card issuer instead of withdrawing money that’s actually yours. Because of this, there may be high interest rates and fees that are attached to the money you withdraw.

Problems with Cash Advances

When you’re thinking about getting a cash advance, there are potential issues you may need to be wary of.

Some of these issues include:

  • Steep interest rates. Like we’ve mentioned, the interest rates on a cash advance can be high, so you’ll need to be aware of what they are before you decide to use one.
  • Low limit. If you have a cash advance option available through your credit card provider, it may be lower than the normal credit limit on your card.
  • In addition to high interest rates, there are often fees attached to your advance which may vary between 3% to 5% of the amount you withdraw.
  • You may start to pay interest immediately. When you make a purchase on your credit card, there will generally be a grace period where you can pay off what you owe before you’re charged interest. Cash advances often don’t have a grace period and you may start accruing interest right away.

Before you decide to apply for a cash advance with a lender or take one out via your credit card, there are certain questions you may want to ask yourself. What am I going to use this money for? Is it an emergency situation? Can I afford the high interest and fees? Do I have any other means of getting money in this situation?

Make sure you’re evaluating the right criteria and never take an advance or a loan that you can’t afford to pay back. You should have a plan in place to pay it off before you apply, and you should incorporate your debt repayments into your regular budget.

When to Consider a Cash Advance

As a general rule, you should only use a cash advance when you’re in an emergency situation and your options are limited. Because of the high interest rates and fees associated with cash advances, they’re not designed to be used for everyday use. You might consider using one when:

  • You’re facing an unexpected auto repair that could force you to miss work if you don’t fix it right away.
  • You have to take a trip to the emergency room.
  • Your furnace breaks down in the dead of winter and you need a quick fix.

If you don’t have the savings to cover it, a cash advance may be able to help you out in these scenarios. You should also remember that you should only take out online loans when you’re sure that you’ll be able to pay it back quickly to avoid accruing interest.   

Alternatives to Cash Advances to Maintain Your Credit Score

Does a cash advance hurt your credit score? In many instances, it may have the potential to. Whenever you take out loans online – like installment loans – and your payment activity (which includes non-payments) is reported to a credit bureau, your credit score may be impacted. If you start missing payments, this can have a negative impact on your payment history, which is a significant part of how your credit score is calculated.

Person in blue blazer smiling at cash advance documents.

Even if you take a cash advance from your credit card and this doesn’t appear as its own item on your credit report, this can affect your credit utilization ratio, which is the amount of debt you have on your revolving credit accounts relative to the amount of available credit you have across all accounts. This can impact the “amounts owed” portion of your credit score. The more of your available credit that you use, the riskier you may seem as a borrower in the eyes of certain lenders.

If you want to avoid using a cash advance, you may want to consider building up an emergency fund to cover any emergency expenses you may face in the future. This can take time, but if you can manage to incorporate emergency fund contributions into your monthly budget, you may be able to save up enough money to handle the next emergency expense that may come your way. You may also want to think about taking on some odd jobs to boost your emergency fund.

Get More Information on Cash Advances and Your Credit Score

If you’re considering taking a cash advance – or making any major financial decision for that matter – the best thing you can do is to educate yourself on these topics as much as possible. You’re going to want to make informed choices when it comes to your finances, and the implications of taking out a cash advance is no exception.

If you want to brush up on cash advances, credit scores, or other important financial concepts, visit our Financial Articles hub to learn more!

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